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Their operations/profits
Investments into the business
Borrowing activities
When cash flows are being assessed the business owner, or their advisor is really going through 5 key areas of the business cash. Those areas are as follows:
1. Reviewing the income statement
2. Analyzing what cash needs to be spent on new equipment, plant, etc
3. Checking the overall working capital situation
4. Determining the total annual cash flows
5. Putting a value on those future cash flows
Where does the acquirer begin in this entire process? A careful review is made of the income statement with respect to gross profit margins and fine net income. After determining that final net income number the analyst ' adds back ' the amount of deprecation the company took, as it was not a real cash outlay.
This leaves us with somewhat of the 'magic number '- aka 'EBIT '. (Earnings before interest and taxes)
Careful analysis is made of the income statement - all the basics are reviewed: sales goals, material costs, profits, and the administrative expenses. Since the business owner is making an investment in the future when he buys a firm generally the above analysis is done for 3-5 years out.
We then carefully look at all equipment (point 2 above) and determine useful life and replacement needs.
Item 3 brings us to working capital analysis. As sales grow we need to carry more inventory and receivables, balance by what our suppliers will give us for credit, as well as what we can negotiate with the bank for operating facilities
The business owner, the acquirer also will review what is known as the 'terminal value' of the cash flow. This is a more complicated analysis involving projected cash flows divided by the cost of capital - growth.
We are in the home stretch - the final part of our analysis takes those future free cash flows and does a present value calculation to see what they are worth today.
In summary, whether Wall Street analysts are contemplating a multi billion dollar merger, or if a business owner is looking to buy Bob's Seed Supply the above valuation techniques are those that are always used by business acquirers and their advisors. The company, and its cash, is looked at from every angle in order to determine possible issues and changes required. A solid cash flow valuation will make or break the quality of the acquisition. The owner is 'counting' on that!
7 Park Avenue Financial :
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Office = 905 829 2653
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations .
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Stan Prokop
Article Source: http://EzineArticles.com/expert/Stan_Prokop/432698
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